The Delhihigh court has instructed tax authorities not to adjust refunds due against past outstanding demands under any circumstances without informing the taxpayers.

Other key directives issued by the HC include that interest on refund should be paid to taxpayers for delays not attributable to them. Another related issue was also addressed by the HC. At times taxpayers are denied TDS credit because of a mismatch between the TDS claimed by them in their returns and that uploaded by the tax deductor.

The HC has directed that in such cases, the taxpayer must not suffer and tax authorities must take up the issue with the tax deductor. When the taxpayer furnishes proof of TDS, the tax officer should verify it and grant him the benefit of the tax deducted at source. It is learnt that following the HC's order, the directorate of income tax (systems) had issued instructions a few days ago to rectify the procedures.

A central processing unit (CPU) was set up by the tax authorities in Bangalore for pan-India processing of returns and issue of refunds. Prior to March 31, 2010 this exercise was decentralised and undertaken manually . However, teething problems at the CPU resulted in taxpayers being denied TDS credit.

Even when tax had already been deducted at source, either tax demands were raised on taxpayers or refunds due to them were adjusted against the tax demand. The tax authorities have admitted to the HC that the data uploaded in the CPU has errors. According to this data, Rs 2.33 lakh crore was payable as past arrears (payable before March 31, 2010) by taxpayers.

"The magnitude and number of taxpayers adversely affected can be appreciated from the past arrears figure of Rs 2.33 lakh crore, which the tax authorities accept may not be correct," states the HC order.

The exact incorrect amount is not known. However , based on this figure of past arrears, 23 lakh adjustments, in respect of one year alone, were made by the tax authorities . "This effectively means that 23 lakh tax payers were denied a refund or have been refused a full refund on account of past arrears," the HC order observes.

"Rejection of TDS or failure to get credit of TDS which has been deducted and paid hurts the tax payer and puts him through needless harassment , inconvenience and costs. It also gives a bad name to the revenue department . The problem, being systematic and institutional, has to be addressed on a general scale," the order says.

Tax is deducted at source against a multitude of income , be it by banks deducting tax at source against interest on fixed deposits, or companies deducting tax at source against their employee's salary.

Anand Prakash, a CA, wrote to the Delhi high court last April pointing out the difficulties being faced by the tax payers. His letter said that tax authorities give credit of TDS which stands reflected in its online computer record (inForm 26AS).